Ultimately, Mr. James settled his claim against Ms. Rivers. She did not personally fund any of the settlement proceeds. Instead, State Farm paid Mr. James $43,000 on Ms. Rivers' behalf in exchange for a full and complete release from liability. After paying his attorney a one-third contingency fee plus costs and sales tax, Mr. James' net settlement was $19,927.54.

Following the settlement, State Farm, relying on the reimbursement clause in the policy it had issued to Mr. James, demanded that he reimburse it for the $5,000 payment it made on his behalf to cover medical expenses. State Farm did not reduce its request to account for the attorneys' fees and costs Mr. James had incurred to obtain his recovery from Ms. Rivers.

Mr. James refused to reimburse State Farm for any amount; instead, he sued State Farm, seeking a declaratory judgment to determine his contractual rights under the policy.

The trial court held that the policy's reimbursement clause was ambiguous. As a consequence, the trial court construed the policy against State Farm and granted summary judgment to Mr. James.

The dispute reached the Supreme Court of South Dakota.

The State Farm Policy

The State Farm policy provided:

Our Right to Recover Our Payments . . . 

Reimbursement

If we make payment under this policy and the person or organization to or for whom we make payment recovers or has recovered from another person or organization, then:

(1) we are entitled, upon payment, to an assignment of any cause of action, or judgment obtained against such other person or organization and

(2) the person or organization to or for whom we make payment must:

(a) Hold in trust for us the proceeds of any recovery; and

(b) Reimburse us to the extent of our payment; with no reduction taken for attorney fees incurred in obtaining a settlement from a judgment against such other person or organization.

(Emphasis in original.)

The South Dakota Supreme Court's Decision

The South Dakota Supreme Court affirmed, finding that the phrase “recovers or has recovered from another person” in the reimbursement clause in the State Farm policy was ambiguous.

In its decision, the court explained that there were “two equally reasonable interpretations of the reimbursement provision when viewed objectively in the context of the entire agreement.”

The court noted that Mr. James had a legal claim against Ms. Rivers, but that his actual recovery came from settlement proceeds State Farm had paid pursuant to its policy with Ms. Rivers. Therefore, the court said, the language could be interpreted to mean State Farm had a right to reimbursement because Mr. James had recovered from Ms. Rivers, who was “another person.”

The court then pointed out that Mr. James had recouped his financial loss following the accident from State Farm, not from “another” person or organization. The court said that the policy language also could be interpreted to mean that Mr. James had recovered from State Farm, the party who actually had paid Mr. James. Based on the uncertainty regarding the term “recovery,” the court found that the text of the reimbursement provision was ambiguous.

Because there were two reasonable interpretations of the reimbursement provision, the court concluded that the language “another person or organization” in the reimbursement provision did not include State Farm or any of its insureds and, therefore, that State Farm had no contractual right to reimbursement for the $5,000 it had paid to Mr. James for medical expenses under the policy.

The case is James v. State Farm Mutual Automobile Ins. Co., No. 28547 (S.D. May 29, 2019). Attorneys involved include: HILARY L. WILLIAMSON of Fuller & Williamson, LLP, Sioux Falls, South Dakota, Attorneys for plaintiff and appellee. JOHN STANTON DORSEY, KIMBERLY PEHRSON of Whiting, Hagg, Hagg, Dorsey & Hagg, LLP, Rapid City, South Dakota, Attorneys for defendant and appellant.

Insurance Coverage Law Center Comment

It is worth noting that the South Dakota Supreme Court said that, to avoid the ambiguity in the reimbursement clause, State Farm could have specified that “another person or organization” could include both another person that State Farm insured or State Farm, itself, or simply allowed reimbursement where an insured recovered “from another person or his [or her] insurer.”